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Strong beat on profitability

? V-Mart Retail’s (VMART) revenue grew 13% YoY in 1QFY26, led by 14% store additions as SSSG was muted at 1% due to the shift of Eid to 4QFY25.

? EBITDA rose ~28% YoY (15% beat), driven by lower inventory provisioning and reduced A&P spends. EBITDA margins jumped to 14.3% (up 165bp).

? Management continues to target 12-15% net store additions and mid-tohigh single-digit SSSG, with consistent improvement in profitability driven by disciplined cost controls across segments.

? We raise our FY26/27E EBITDA by ~2% each, driven by stronger margin performance in the core VMART format. We model a CAGR of 16%/25% in revenue/EBITDA over FY25-28E, driven by ~12% CAGR in store additions, mid-single-digit SSSG, and further reduction in LR losses.

? The recent correction (VMART -9% in the last 1M, -20% YTD), along with improved profitability, makes its valuations attractive (~19x Sep’27 preINDAS 116 EBITDA). We upgrade VMART to BUY with unchanged ~13x Sep’27E EV/EBITDA (implies 25x pre-IND AS 116 EBITDA) to arrive at our revised TP of INR1,035.

EBITDA +28% YoY; big beat on margins due to lower LR losses

? Revenue grew 13% YoY to INR8.9b, driven by 1% blended SSSG and ~14% YoY store additions.

? VMART opened 15 new stores (10 in VMART and five in Unlimited) and closed two stores (one each in VMART and Unlimited), taking the total store count to 510 stores (VMART 421 and Unlimited 89).

? Blended SSSG moderation was driven by the shift of Eid to 4QFY25. Normalized for the same, SSSG would have been ~5%.

? Gross profit grew 13% YoY at INR3.1b (2% above), as gross margin expanded 10bp YoY to 35.3% (55bp beat).

? Other expenses declined 3% YoY to INR912m (10% below our estimate), driven by ~100bp YoY decline in A&P spends and reduction in LR losses.

? Reported EBITDA stood at INR1.3m (+28% YoY, 15% beat) with margins improving 165bp YoY to 14.3% (185bp beat). Pre-IND AS EBITDA grew 40% YoY to INR0.6b, with margin expanding 130bp YoY to 6.9%.

? Depreciation increased 20% due to a change in lease accounting, while interest cost declined ~51% YoY.

? VMART reported PAT of INR336m (vs. our estimate of INR257m), led by higher EBITDA and lower finance costs.

Segmental performance

? VMART (core): Revenue grew 14% YoY to INR7.4b, driven by nine net store additions (up 14% YoY) and ~1% SSSG. Reported monthly SPSF was stable YoY at INR748. EBITDA grew 22% YoY to INR1.06b, as margin expanded ~100bp YoY to 14.4%, driven by gross margin expansion of 90bp.

? Unlimited: Revenue grew 11% YoY to INR1.4b, driven by four net store additions (up 14% YoY) and ~1% SSSG. Reported monthly SPSF grew ~5% YoY to INR603. EBITDA rose 9% YoY to INR245m, despite margins contracting ~30bp YoY to 17.7% due to gross margin contraction of ~70bp.

? LimeRoad (LR): Commission income declined ~47% YoY to INR62m, while operating loss reduced ~55% YoY to INR46m (vs. INR68m QoQ, INR103m YoY), driven by a further reduction in advertisement spends.

Higher footfalls and volume drive growth as ASP moderates in Unlimited

? Overall footfalls grew ~11% YoY to 20m, with conversions improving ~100bp YoY to 48%.

? Report monthly SPSF stood at INR716 vs INR711 in 1QFY25.

? Blended ASP declined ~1% YoY to INR218, driven by pricing rejig in Unlimited (- 6% YoY to INR396). Overall sales volume grew ~14% YoY.

? Blended ATV declined ~3% YoY to INR1,004, driven by 3%/5% YoY decline for VMART/Unlimited. Overall transactions grew ~16% YoY.

Highlights from the management commentary

* Demand trends: Demand was slightly impacted by the shift of Eid to 4QFY25, border tensions in the Northern region, and early monsoon. Overall, demand sentiment is mildly positive, but few headwinds persist in East India, where cross-border demand from Bangladesh has weakened. In contrast, North India (states such as Rajasthan and Uttarakhand) saw robust growth.

* Demand outlook: Demand was slightly soft in July but is likely to pick up with the onset of the festive season from August. Additionally, with inflation in check and better monsoons, rural consumption should pick up. Competition from national as well as regional value retailers is rising, driven by higher store openings. However, this is also leading to higher footfalls for organized value retailers. VMART continues to focus on driving profitable growth.

* Guidance: Management reiterated its target of 12-15% net store area additions (~65 stores) and mid-to-high single-digit SSSG in FY26. Emphasis remains on increasing fashion content, maintaining tight inventory control, and adopting selective marketing to improve overall profitability.

* Margins: Margins in 1QFY26 were impacted by lower SSSG, which is likely to see a pick-up in 2Q-3Q. Overall, VMART is targeting a higher absolute margin, driven by volume-led growth for FY26.

Valuation and view

* The improved productivity of VMART/Unlimited stores, the closure of nonperforming stores, and lower losses in the online segment have led to an improvement in VMART’s overall profitability.

* VMART remains a key beneficiary of the unorganized-to-organized retail shift and the massive growth opportunity in value fashion.

* However, with aggressive store expansion by many value retailers, rising competition in value retail remains a key watch.

* We raise our FY26/27E EBITDA by ~2% each, driven by stronger margin performance in the core VMART format. We model a CAGR of 16%/25% in revenue/EBITDA over FY25-28E, driven by ~12% CAGR in store additions, midsingle-digit SSSG, and further reduction in LR losses.

* Recent correction (VMART -9% in the last 1M, -20% YTD), along with improved profitability, makes its valuations attractive (~19x Sep’27 pre-INDAS 116 EBITDA). We upgrade VMART to BUY with unchanged ~13x Sep’27E EV/EBITDA (implies 25x pre-IND AS 116 EBITDA) to arrive at our revised TP of INR1,035.

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